Investors in major gold producers may enjoy some long-overdue gains next year as companies hope to cash in on the precious metal's ability to sustain historically high price levels.
Gold's pullback from record highs above USD1,225 an ounce this month is seen by some analysts as a key stage in its longer-term uptrend. Sustained price gains are likely to be supportive for miners in a way occasional forays to record highs have not been.
"Once prices stabilise, whether it's at USD1,000 or USD1,100, you will find significant buying coming back to the gold equity market," said RBC Capital Markets analyst Leon Esterhuizen.
"I would expect people to buy the equities up to the gold price level at that time, because then you are basically gearing up for the next run."
General pricing levels for gold equities were at least USD200-300 behind spot prices when the metal was trading around USD1,200 an ounce in anticipation of a pullback, Esterhuizen said.
Gold has fallen more than 9 percent after surging last month on the back of central bank buying and dollar weakness, fuelling hopes the metal may be building a base at higher levels.
Most major gold miners have underperformed 2009's 27 percent rise in bullion prices. Strong local currencies have raised costs for many, outweighing the impact of higher metal prices.
South Africa's Harmony Gold, the fifth-largest gold miner, is the biggest underperformer of the world's top 10 gold producers. Its shares have dropped 19 percent this year, mainly due to the strong rand.
Forecating woes
"Gold companies have been bad at forecasting production and costs," said Theresa Gusman, global head of commodities at DB Advisors, the asset management subsidiary of Deutsche Bank.
"As production has fallen short of expectations and costs have continued to increase, it has been very good for the gold price - but for stock prices it has been bad."
Russia's biggest gold miner Polyus Gold was the only top 10 producer to outperform bullion. Its shares more than doubled helped by rouble depreciation, resolution of a shareholder conflict and good growth prospects.
"It's the company with the largest organic growth profile among the major and mid-sized gold miners," said Vladimir Zhukov, metals analyst at Nomura Research in Moscow.
Gold companies historically have not been good at delivering returns on capital compared with, say, copper producers, but analysts say majors such as AngloGold Ashanti, Newmont and Barrick may soon be delivering greater returns.
Some miners, such as Barrick, struggled to capitalise on rising prices due to unfavourable hedging deals.
AngloGold and Barrick have announced the closure of their hedging programmes, under which they sell future production at agreed prices, and major producers are not expected to resume hedging even at high metal prices.
JP Morgan said it expects its South African gold share picks to outperform gold prices in the next six months. "We see upside in the rand gold price and in our South African gold share picks despite the challenging near term operating environment."
Its top picks are AngloGold and Gold Fields the world's third- and fourth-biggest gold miners.
Kate Ward, an analyst at Westhouse which mainly advises companies on London's junior AIM market, said she prefers gold equities to bullion as an investment, citing organic growth projects and takeover premiums as well as higher metal prices.
